That's the key finding of a new study by health policy researchers at the University of Pittsburgh, who studied actual Part D enrollee data for 2009. The researchers compared total spending by Part D enrollees - defined as premiums plus out-of-pocket spending - with the least expensive insurance option that would have met their needs.

Just 5 percent had picked the most cost-effective plan; more than 30 percent over-spent by $300 to $500 and nearly 20 percent over-spent by $500 to $1,000. Looked at another way, the researchers found that 22 percent of beneficiaries could save at least $500 a year by switching to the cheapest plan available.

Those amounts are significant, considering that most seniors live on fixed incomes. Half of all Medicare recipients this year have income of $22,500 or less, according to the Kaiser Family Foundation, and incomes are roughly half that amount among African Americans, Latinos and single seniors.

WHY THE DISPARITY?

Part D offers seniors the opportunity to shop in a private marketplace of insurance plans. In most parts of the country, enrollees can choose among dozens of plan options. They can shop for a plan that best fits their needs during the annual enrollment season, which is underway now and continues through December 7.

The University of Pittsburgh study results undercut a key argument in favor of further Medicare privatization - namely, that consumer choice and competition produce the best efficiencies in healthcare.

Paul Ryan is a prominent political champion of that argument, which he reiterated in last week's vice presidential debate: "Choice and competition - we would rather have 50 million future seniors determine how their Medicare is delivered to them instead of 15 bureaucrats deciding what - if, where, when they get it."

But the University of Pittsburgh researchers found that most seniors don't make optimal consumer decisions. They measured the difference in total spending (premiums plus out-of-pocket spending) that occurred in seniors' actual plan choice and the cheapest plan available based on their medication needs.

They found that enrollees don't buy the most cost-efficient coverage. In some cases they don't shop around enough, and other times they are risk averse and decide to over-protect themselves with more expensive coverage than they actually need.

Plan deductibles were a major pitfall, the study found. Three-quarters of the Medicare population studied opted for zero-deductible plans, but they would have fared better in plans with deductibles. So they over-spent by $257 on average.

The researchers also found that enrollees were over-protecting themselves against the possibility of spending so much that they crossed the threshold into the doughnut hole - the nearly $4,000 gap in which seniors have to pay 100 percent of the costs between where regular coverage ends and catastrophic coverage picks up the tab.

Seniors can buy policies with gap coverage, but the premiums are much higher - averaging $95.74 this year, compared with $36.15 for plans without gap coverage, according to Avalere Health, a healthcare consulting company. Some policies also cover generic drug costs in the gap (a feature not available on standard policies), but the researchers found that seniors with generic gap coverage overspent by a median $683 per year.

"We'd agree that people are paying more than they need to in many cases," said Mary Dale Walters, senior vice president of Allsup Medicare Advisor, a fee-based service that assists seniors with Medicare plan shopping. "Only 3.6 million people will actually hit the doughnut hole, so too many people are worrying about having coverage there."

The researchers also found that seniors with chronic conditions such as diabetes or heart failure were no more likely to over-insure. While they did find that shopping acumen declined with age, beneficiaries experiencing cognitive decline actually were more likely to purchase cheaper plans.

"Patients who over-spend either didn't look around much for the cheapest plan, or they were risk averse and wanted more expensive coverage to protect themselves," said Yuting Zhang, associate professor of health economics at the University of Pittsburgh Graduate School of Public Health, a co-author of the study.

The most common shopping mistake is to consider only your current premium and whether it is acceptable for the coming year, Walters said. "Many seniors aren't looking further." Key factors to consider, she said, include any limits on drug quantity, or changes in the cost of regular medications.

Zhang advised seniors to use the Medicare Plan Finder online tool (link.reuters.com/cef43t) to find the most cost-efficient plans. The plan finder allows seniors to enter their medications and dosages, and view a ranking of plans by cost. She also advised staying away from doughnut hole coverage unless your previous year's medication history indicates you'll need that protection.

What Zhang would really like to see is a helping hand from the Centers for Medicare & Medicaid Services (CMS), which administers Medicare. "CMS could send a letter every year recommending the best three plans for you, based on your drug usage last year. They could even assign you to a plan based on your medication history - it wouldn't be that difficult to do."